China’s new exchange rate regime makes economic sense – S&P

SINGAPORE - Standard & Poor's says China's surprise move to allow more exchange rate flexibility makes good economic sense and is not the start of a currency war - or an attempt to jump-start growth.

"The move is more likely to be due to a relatively benign "technical correction" aimed at improving market functioning, or an effort to comply with IMF conditions to get the yuan included in the special drawing rights (SDR) basket sooner rather than later,” S&P says.

"The argument that China is trying to spur growth by weakening its currency to spur exports does not strike us as very convincing," S&P Chief Economist for Asia-Pacific, Paul Gruenwald, said.

"Exports are more a function of foreign demand, with the exchange rate playing a secondary role. There is no reason for that relationship to have changed."

Standard & Poor's doubts that the move was driven by weak July trade data since these have been soft for some time - the trade surplus has been trending at a high level.

"We see the timing as opportune. This is because China can now say that, by moving to a more market-determined rate, it is delivering what the IMF and US Treasury have been asking for. And since the pressure is now on the yuan to weaken, having more exchange rate flexibility is palatable to the Chinese authorities," Gruenwald says. www.standardandpoors.com (ATI).